Economic Development in Africa Report 2019
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UNCTAD UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT The advent of the African Continental Free Trade Area represents a historic opportunity for the continent to boost intra-African trade and accelerate ECONOMIC structural transformation. However, this relies on a critical policy instrument – the DEVELOPMENT IN effective implementation of preferential trade liberalization among the members of the African Continental Free Trade Area. Whether African firms, in practice, will use tariff preferences under the African Continental Free Trade Area depends on a critical factor: rules of origin and the net benefits of complying with them. The Economic Development in Africa Report 2019 argues for the adoption of lenient and flexible rules of origin and a strengthening of institutional capacities to ensure impartial, transparent and predictable implementation of agreed rules AFRICA ECONOMIC DEVELOPMENT IN REPORT 2019 of origin. unctad.org/Africa/series “Rules of origin in the African Continental “The UNCTAD Economic Development Free Trade Area lie at the core of what in Africa Report 2019 makes a valuable it is means for goods to be ‘made in contribution to ongoing discussions Africa’ and for Africa. At the eve of the on rules of origin, which are an entry into force of the world’s largest important facilitator of intraregional free trade area, this report provides the trade in Africa. Rules of origin are a basis for decision-making over the right vital component in all market access set of rules of origin for the development agreements undertaken in accordance of a selection of African value chains. I with World Trade Organization rules. 2019 REPORT am proud to count the report among the This timely report recognizes the contributions of UNCTAD as a strategic role that context-specific rules of partner of the African Union for the origin can play in contributing to the African Continental Free Trade Area.” successful implementation of the African Mukhisa Kituyi Continental Free Trade Area – which is of Secretary-General, United Nations importance to us all.” Conference on Trade and Development Roberto Azevêdo Director-General, World Trade Organization Made in Africa Rules of origin for enhanced intra-African trade UNITED NATIONS UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT Economic Development in Africa Report 2019 Made in Africa – Rules of Origin for Enhanced Intra-African Trade Geneva, 2019 CChapterhapter 5 Main messages and recommendations 5.1 Introduction This report argues that rules of origin are a cornerstone of the effective implementation of preferential trade liberalization among members of the African Continental Free Trade Area, without which gains cannot accrue towards Africa. Rules of origin should consider different levels of productive capacities and competitiveness between countries, to help foster regional production. Complementary policies such as business, competition and trade facilitation measures, to keep local inputs competitive relative to external suppliers, are critical to ensure trade creation rather than trade diversion. The sourcing of intermediate goods is key in the ability of firms to specialize and participate in regional and global value chains. Rules of origin should account for this need and not be overly restrictive, in particular in trading areas in which competitive intermediates cannot easily be sourced. This chapter recapitulates some of the main findings, messages and policy recommendations emanating from the report. GETTING RULES OF ORIGIN RIGHT COULD: Enhance the gains from the AfCFTA* Boost intra-African trade Reduce informal trade Support industrialization Strengthen regional value chains Foster structural transformation Create decent jobs GETTING RULES OF ORIGIN WRONG COULD: Erode benefits of the AfCFTA* Lead to low utilization of trade preferences *African Continental Free Trade Area Made in Africa – Rules of Origin for Enhanced Intra-African Trade 5.2 Main findings This report finds that most regional integration in Africa has taken place at the level of regional economic communities or at a subregional level, and at an uneven pace. The bulk of trade across such communities takes place on a most-favoured nation basis. The African Continental Free Trade Area can redress this situation by encouraging trade across communities, thereby ensuring a better harnessing of trade complementarity across the continent. For example, cocoa-producing countries in West Africa export most produce, in its raw, unprocessed, form, to outside the continent, yet the most important continental chocolate manufacturers, in Egypt and South Africa, rely mainly on cocoa paste and cocoa butter imported from outside Africa (see chapter 3). The Continental Free Trade Area can help address such continental disconnects, which also arise with regard to other primary commodities. The analysis using the product complexity index shows that there are opportunities for deeper regional integration to support structural transformation in both small and large economies in Africa (see chapter 1). This is due to the relative degree of sophistication of products exported to regional markets, compared with those exported to the rest of the world. Therefore, rules of origin need to be reasonably simple (in the sense of being clear and understandable), transparent and predictable, to facilitate intra-African supply chain trade. There is an inherent complication, however, with the commitment as part of the Continental Free Trade Area to respect the “acquis” of the regional economic communities. There is a critical need to increase investment in transport infrastructure (road, rail, air and port) in Africa, to address supply-side constraints and bottlenecks to intra-African trade. Rules of origin are a necessary instrument to implement preferential trade liberalization. As such, how they are addressed in the Continental Free Trade Area will directly affect the size and distribution of economic benefits among member countries and, ultimately, the political will of members to advance regional integration to create an African economic community. In this context, appropriate rules of origin can enhance the gains accruing to members and enable more inclusive outcomes. However, the design of rules of origin should not lead to a situation in which trading with extracontinental firms is easier and less costly than trading with firms in Africa. This would undermine the rationale of the Continental Free Trade Area. The smooth and impartial implementation of rules of origin requires adequate institutional and organizational capacities among firms and customs authorities. Such requirements become greater as the rules become more complex and certification becomes more 197 Economic Development in Africa Report 2019 difficult. In Africa, the complexity of relevant rules of origin regimes and certification procedures varies. In several instances, overlapping regional economic community memberships and competing regimes add to the level of complexity. The findings in this report reinforce the suggestion that the African Continental Free Trade Area could represent a game changer for development prospects in Africa, for at least three sets of reasons. First, given the relatively high levels of most-favoured nation tariffs across all value chains considered and the fact that most trade across regional economic communities takes place on a most-favoured nation basis, there is scope to extend significant preference margins to all exporters in Africa. Second, in commodity- based value chains (e.g. cocoa, cotton and tea), redressing the fragmentation of the market in Africa across regional economic communities could greatly contribute to better harnessing trade complementarities, opening opportunities to enhance value addition on the continent. Third, as shown with regard to the automotive value chain, strategic outward orientation, in this instance at the regional level, could have an impact on enhancing the viability of value chains that rely heavily on economies of scale. Consolidating a critical mass of potential customers could help to attract original equipment manufacturers, providing an incentive to deepen the engagement of countries in Africa in activities connected with lower-tier suppliers. 5.3 Main messages and policy recommendations The creation of a single market of 1.3 billion people creates opportunities for businesses to trade and grow across the continent. However, trade does not automatically lead to more inclusive and sustainable development, nor does it automatically translate into higher levels of employment. By shaping the space for regional value chains, well- designed rules of origin can play a role in turning more trade into more decent jobs that, in turn, can contribute to a more inclusive growth path. Establishing the right mix of rules of origin and sector-specific industrial policy instruments is key in achieving these objectives. Ideally, policy decisions should be informed by a careful assessment of the direct and indirect effects of trade at the sectoral level on the labour market in each member country. Without such studies, policymakers might rely on existing knowledge on the characteristics of sector-specific labour impacts. For example, the clothing sector may be associated with a high share of women’s employment. The rules of origin of the African Continental Free Trade Area will be the gatekeepers of continental regional integration. Getting the rules of origin wrong could erode the 198 Made in Africa